BAE Naval Shipyards at Risk as U.K. Urged to Speed Frigate Order

Jan. 31 (Bloomberg) -- Britain should bring forward orders
for a new generation of navy frigates to help BAE Systems Plc
bridge a production hiatus that’s threatening its warship-making
capabilities and 6,000 engineering jobs, the Unite union said.

Europe’s No. 1 weapons-maker said this month it had begun a
study into future options for yards in Scotland and Portsmouth,
England, once production slows with the completion of two Royal
Navy aircraft carriers in 2018. The first Type 26 frigate isn’t
due to be delivered until the early 2020s, leaving the sites
dependent on support work and minor programs for foreign fleets.

“The government can’t expect a private company to keep
thousands of people sweeping the floor or painting its workshops
waiting for the work to come in,” Ian Waddell, Unite’s national
officer for aerospace and shipbuilding, said in an interview.
“It should bring the contract forward to span the gap.”

The situation has gained a political twist as the Scottish
parliament moves to hold an independence referendum in 2014,
Waddell said. Portsmouth would more likely be retained by the
U.K. government in the event of a vote that would effectively
place the two Glasgow yards in a foreign country, he said.

BAE spokeswoman Kristina Crowe declined to comment directly
on job prospects and said that the study led by LEK Consulting
will provide analytical and modeling support to the warship
business, aiding usual planning activities.

Government Agreement

The London-based company was already evaluating operations
in response to falling defense budgets, and said Sept. 27 it
would cut 3,000 U.K. posts to trim costs and slow production of
Eurofighter warplanes, having eliminated 15,000 positions
globally in 2009 and 2010.

“We are reviewing how best to retain the capability to
deliver and support complex warships in the U.K.,” Crowe said.

The appraisal will be in line with commitments given in a
2009 agreement with the U.K. government, she said. That accord
guarantees “minimum future work levels” over a 15-year-period
while committing BAE to delivering “substantial” efficiency
improvements, the Ministry of Defence said in an e-mail.

The carrier and frigate programs already dovetail as
closely as can be expected and, a smaller volume of work will
inevitably translate into job cuts and lost skills, said Francis
Tusa, London-based editor of the Defence Analysis newsletter.

Construction of hull sections for the HMS Queen Elizabeth
and HMS Prince of Wales aircraft carriers is being undertaken at
BAE’s Scotstoun and Govan yards on the River Clyde in Glasgow
and in Portsmouth, with the ships due to be assembled at Babcock
International Group Plc’s dockyard in Rosyth, near Edinburgh.

Design Fix

An assessment of the Type 26 that began in 2010 won’t end
before 2014, after which the government must sign off on the
project before BAE can commence manufacturing. The first example
will be delivered after 2020, though it’s “difficult to give an
exact date,” Crowe said.

Ships will be built at a rate of about one a year, with a
requirement for anti-submarine and general-purpose versions to
replace 13 Type 23 frigates dating to 1989.

The frigate program could be accelerated by fixing the
design as soon as possible and then eliminating the usual gaps
between phases, cutting as much as two years from development
and minimizing the lull between projects, Waddell said.

Export orders for the Type 26 could boost the production
run, and the vessel is being pitched to foreign governments as
the so-called Global Combat Ship. Britain has formally invited
Brazil to become a partner in the program, and is looking at
opportunities in Turkey and Malaysia, BAE said.

Layoffs Likely

Still, some job cuts seem inevitable, because even bringing
forward the Type 26 won’t compensate for the end of work on the
carriers, Waddell said. The carriers are Britain’s biggest-ever
warships at 920 feet long and 65,000 metric tons displacement.

“I can’t see how you can maintain that level of
employment,” he said. “You’re going from two huge carriers to
one relatively small vessel.”

Accelerating Type 26 production may not be possible because
of the program’s complexity, and engineering know-how is likely
to be lost, said Howard Wheeldon, senior strategist at BGC
Partners in London, adding there are “question marks” over the
status of guarantees provided in the 2009 agreement.

“There’s a lot of mistrust between contractors and the
government,” said Wheeldon, who has covered the European
defense industry for 20 years. “There’s supposed to be a
commitment to providing sufficient work, but that’s going to be
very, very difficult. The writing has to be on the wall for
Portsmouth.”

Ending an Era?

The Portsmouth yard, employing 1,500 people in shipbuilding
and a similar number providing support to vessels including
Britain’s Type 45 destroyers, may be most at risk since it can’t
offer the synergies that exist between BAE’s Glasgow yards,
which support 3,000 manufacturing jobs and are located less than
2 miles apart and 30 miles from Rosyth, Waddell said.

Closing Portsmouth would end more than 500 years of naval
shipbuilding in the city. Vessels from Henry VIII’s Mary Rose to
the galleons that drove off the Spanish Armada and HMS
Dreadnought, the first modern battleship, were built in the
south-coast city, which is also home to the oldest functioning
dry dock, housing HMS Victory, Nelson’s flagship at the Battle
of Trafalgar.

The Royal Navy also has its main management headquarters in
Portsmouth and bases two-thirds of the surface fleet there.

BAE, whose stock has gained 10 percent so far in 2012 after
declining for the past four straight years, says that Portsmouth
should in any case obtain additional work to fit one aircraft
carrier with catapult equipment needed to operate Lockheed
Martin Corp. F-35 Joint Strike Fighter jets.

And the Scottish independence vote could favor the
retention of Portsmouth to preserve capabilities within a U.K.
reduced to England, Wales and Northern Ireland.

“If there is full independence, then the government has to
make a decision,” Waddell said. “It’s not just about
shipbuilding. There is a huge aerospace industry, and complex
weapons. It’s a real constitutional issue that has not been
debated yet.”